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Game Theory and International Environmental Cooperation

Michael Finus

The book investigates various strategies to provide countries with an incentive to accede, agree and comply to an international environmental agreement (IEA). Finus shows that by integrating real world restrictions into a model, game theory is a powerful tool for explaining the divergence between ‘first-best’ policy recommendations and ‘second-best’ designs of actual IEAs. For instance he explains why (inefficient) uniform emission reduction quotas have played such a prominent role in past IEAs despite economists’ recommendations for the use of (efficient) market-based instruments as for example emission targets and permits. Moreover, it is stated, that a single, global IEA on climate is not necessarily the best strategy and small coalitions may enjoy a higher stability and may achieve more.
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Chapter 12: Infinite Dynamic Games with Continuous Strategy Space

Michael Finus


12. Infinite dynamic games with continuous strategy space INTRODUCTION 12.1 In this chapter we analyze the global emission game characterized in Chapter 9 in the context of an infinite time horizon.1 As argued in the introduction to Chapter 5, a supergame framework seems adequate for most IEAs due to the open-ended character of such agreements. In this chapter attention will be restricted to two countries only. Extensions to more than two countries are considered in Chapter 14. Apart from characterizing the set of subgame-perfect equilibria (SPE), weakly and strongly renegotiation-proof equilibria (WRPE and SRPE) and strongly subgame-perfect equilibria (SSPE) in the global emission game, attention will be given to the stability of the quota and tax bargaining equilibria derived in Chapter 11 and the auction equilibrium derived in Chapter 10.2 Thereby, we assume throughout this chapter that strategic proposals under the tax regime and during the auction process are absent if not explicitly mentioned. The properties of subgame-perfect equilibria will only be discussed when a comparison to the other equilibrium concepts is immediately possible (␦i →1 ᭙ i෈I) due to the conceptual inferiority of this concept. The structure of this chapter is similar to that of Chapter 7; that is, first discount factors close to 1 are assumed (Section 12.2) and then the analysis is extended to discount factors strictly smaller than 1 (Section 12.3). Particular attention will be paid to restricted punishment profiles due to various ‘real world restrictions’ (Sub-sections 12.2.4 and 12.3.4). 12.2 12.2.1 DISCOUNT...

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